Question

There are probably almost as many types of mergers and acquisitions as there are bidders and targets. However, investment bankers find it useful to define three different categories of M&A transactions. Explain in detail.  

Answer 1

Mergers and acquisition can be categorized according to the nature of merger. Most mergers are simply done when one firm takeover another firm, but there are different strategic reasons behind this decision. In the same way, legal terminology also differs from merger to merger.

Types of Mergers

There are generally thee different types of mergers:

1. Horizontal merger:
A horizontal merger is a merger between companies that directly compete with each other. Horizontal mergers are done to increase market power (market share), further utilize economies of scale, and exploit merger synergies.
A famous example of a horizontal merger was between HP (Hewlett-Packard) and Compaq in 2011.
2. Vertical merger:
A vertical merger is a merger between companies that operate along the supply chain. Therefore, in contrast to a horizontal merger, a vertical merger is the combination of companies along the production and distribution process of a business. The rationale behind a vertical merger includes higher quality control, better flow of information along the supply chain, and merger synergies.
(e.g., a retail company in the auto parts industry merges with a company that supplies raw materials for auto parts.)
3. Conglomerate merger:
When two companies that operates in completely different industry, regardless of the stage of production, a merger between both companies is known as conglomerate merger. This is usually done to diversify into other industries, which helps reduce risks (e.g., a clothing company buys a software company).